If you are an entrepreneur who wishes to start up a business in Humboldt County, one of the first questions you will face is what form of business organization should you choose for your business endeavor:
Traditionally, there have been three major forms used to structure a business enterprise:
1) the sole proprietorship;
2) the partnership, including the limited partnership; and
3) the corporation.
Recently, two other business forms have come into widespread use – the limited liability company and the limited liability partnership.
In choosing among these business forms, there are a number of factors which the entrepreneur should consider. Three of the most important factors are:
1) whether you want to limit your personal liability from the debts or obligations of your business;
2) the management and control of the business; and
3) the taxation of the business.
Other factors to consider include the number of owners, the requirements to form the entity, the agency authority of owners and management, and the need for obtaining working capital and investors for your business.
The sole proprietorship is the simplest form of business ownership and is used by approximately two-thirds of all businesses. Generally, these businesses have revenue of less than $1 million dollars annually. There are no filing fees to form the entity, there is no annual minimum tax or user fee, and there are often no or little legal or accounting fees. The biggest weakness of the sole proprietorship is that the owner is personally liable for the debts and obligations of the business.
A general partnership requires a minimum of two partners. There are no filing requirements to form a partnership, but a Statement of Partnership Authority is often filed with the Secretary of State. All general partners have equal rights in the management of the partnership unless a partnership agreement provides otherwise, and each general partner is an agent of the partnership. General partners are jointly and severally liable for the partnership debts and obligations, and for the acts or omissions of any general partner acting in the ordinary course of the partnership business.
A limited partnership requires at least one general partner and one limited partner. The limited partnership entity is not available to attorneys, accountants, architects, banking institutions, insurance companies and trust companies. A general partner of a limited partnership is personally liable for partnership obligations, while a limited partner is not personally liable for partnership debts and obligations unless they participate in the control of the partnership business.
A corporation is formed by executing and filing Articles of Incorporation with the Secretary of State. A shareholder of a corporation is not personally liable for corporate debts and obligations unless a shareholder:
1) personally guarantees corporate debts;
2) receives improper distributions from the corporation;
3) engages in tortious conduct;
4) are subject to “alter ego” claims for commingling personal and corporate matters; or
5) breaches duties to other shareholders of the corporation .
A limited liability company requires a minimum of one member and is formed by executing and filing Limited Liability Company Articles of Organization with the Secretary of State. Similar to shareholders of a corporation, members of a limited liability company are not personally liable for debts and obligations of the LLC unless the members:
1) personally guarantee debts of the LLC;
2) receive improper distributions;
3) fail to pay taxes;
4) engage in tortious conduct; or
5) are subject to “alter ego” claims for commingling personal and LLC matters.
Before you open a business in Humboldt County, or before you take over an existing business in Humboldt County, you should consider each of these factors to determine which form of business entity you want to use to conduct your business. It is also recommended that you seek the advice of your tax professional and a business attorney to assist you in choosing the business entity that is best for you. Our business department is ready to assist you with all your business organization needs. Please contact us.
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